Most business alliances start off with optimism for a successful business relationship. But, what happens when two or more partners find themselves in a dead lock position and are no longer willing or capable of continuing with the business relationship? Conflicts over material decisions can be crippling for the success of a business. It is therefore important for prospective partners to appropriately consider the challenging task of settling how deadlock positions will be resolved or how the business relationship will be terminated. Various methods may be used to provide partners with a speedy escape from an undesirable business relationship. Due to their potential for achieving fair and efficient outcomes, these “escape clauses” have become “boilerplate” in commercial agreements today.

The unique “Texas shootout” clause is an example of such exit provision. This clause enables one shareholder to purchase all of the shareholding in the entity concerned and for the other shareholder to exit. The clause is often used in joint venture contracts and memoranda of incorporations where there are two owners, or two groups of owners, who have similar cash resources, information relating to the entity and are committed thereto.

The playacting of the “Texas shootout” takes the form of a duel between the two owners, or two groups of owners, and can take place in one of the two following ways:

  1. Shareholder A provides notice to shareholder B of its intention to buy all of the shares held by shareholder B for a specified price. Thereafter, shareholder B will have to make a determination as to whether he will accept the offer or make an alternative offer to buy shareholder A’s shares at a higher price. The same right to accept or make a higher offer is then reciprocated to shareholder A. This procedure of offer and counteroffer can continue through many ‘rounds’, with each bid required to exceed the previous highest bid by a specified percentage until such a time that one shareholder surrenders to the other’s offer or counteroffer; or
  2. Shareholder A provides notice to shareholder B of his/her/its intention to sell its shareholding to shareholder B for no specified price. Thereafter, both shareholders will commence the duel by submitting individual sealed bids for their respective shareholding to an independent party, with the right to purchase going to either the highest sealed bid or the fairest sealed bid (being the price closest to the price determined by the independent third party) based on the prior agreement of the shareholders. The sealed bids are opened simultaneously, and the party with the highest sealed bid “shoots the lights out” and “wins”. The winning shareholder then acquires the right to purchase the losing shareholder’s shareholding in the company concerned.

When triggering a “shotgun” clause the offering partner does not know whether they will end up acquiring or selling their shareholding, it is advisable for such clauses to make provision for the method determining the price of the respective shareholdings and the bidding process (if applicable) to be followed in every ‘round’. It is important for this method to be fair and proportionate in order to safeguard the shareholders’ uncertain positioning throughout the process. This controlled practise assists in preventing substantial over, or under, valuations of the entity.

The main principle underlying exit provisions such as the “Texas shootout” is that a successful business should not go to wrack and ruin solely because two owners, or two groups of owners, are unable to agree on fundamental issues. The value of the business as a going concern should be unspoiled by providing for a fair way to allow one party to step down with fair recompense for surrendering their shareholding in the entity.